Arun Shourie, a noted Journalist, Activist, Scholar and Columnist is the author of several books, several of them on a diverse range of subjects related to his journalistic interests, including corruption and brilliant exposé of the Indian Communist party's long-standing anti-national policies.

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Thursday, July 21, 2011

My publicity agent

Thu Mar 24 2011, 00:45 hrs

Another scam . . . Inquiry into
disinvestment of VSNL” — the papers proclaim. The announcement has been
preceded by stories along similar lines in two magazines, a planned
build-up to the announcement.

The government does seem to have surrendered its
judgment to a bully. And it will be sorry for it. But I will come to
that in a moment. The charge is that as the minister of disinvestment in
the NDA government, as part of disinvesting government equity in VSNL
in 2002, I “gifted” 774 acres of prime land in four cities to the Tatas.

The facts are the exact opposite.

During due diligence of VSNL, it was discovered that the
company had been buying land over the years. Technology had changed. It
was now possible to provide the same services with infrastructure spread
over significantly less land. VSNL, working with advisors, identified
774 acres of land as “surplus”, in the sense that it would not be needed
in the future to provide the services for which VSNL had been
constituted

Accordingly, in the agreements
governing disinvestment, it was provided that whoever won the bid for
the company would not get this land. The company was valued by excluding
this land. Indeed, the article in the agreement was framed in such
extreme terms that at one stage the potential bidders said that they
would not go through with the bids at all. The officer who was handling
the disinvestment — one of the strongest officers I had the good fortune
to work with, P.K. Basu (now agriculture secretary) — told them to go
home, and forget the disinvestment. The article would not be diluted one
bit, he told them, disinvestment or no disinvestment.

Eventually, they came round and the disinvestment went
through. It was one of the most hotly contested cases. On the one side
was Reliance — Dhirubhai Ambani was still alive, and was calling the
shots. On the other side were the Tatas. The Tatas won, by a whisker.
That outcome firmly established the credibility of the disinvestment
process. “Even Dhirubhai Ambani could not find out what was going on in
your ministry,” observers told us.

The article that Basu and his colleagues incorporated is
worth reading. It is a short one. It could have been accessed by anyone
from half a dozen sources — but by now it is no surprise that sections
of the media will deliberately not read!

Please read the article, and then I will set out its implications. Here it is:

4.7 LAND

(a) (i) The strategic partner confirms that it shall cause
and procure the company to hive off or demerge the land into the
resulting company pursuant to a scheme of arrangement in terms of the
provisions of Section 391 to 394 of the act.

(ii) The strategic partner confirms its understanding that
it will transfer all such shares in the resulting company to the
government as it may acquire as a consequence of this transaction, that
is a minimum of 25 per cent of the resulting company’s issued equity
shares or a higher number which shall include shares in the resulting
company that it may further acquire as a consequence of any further sale
of the equity shares in the company by the government to the strategic
partner, prior to the demerger, as part consideration of transfer of the
transaction shares and any subsequent sale of the company’s shares by
the government to the strategic partner, pursuant to this transaction.

(b) The strategic partner confirms that:

(i) it shall do and cause to be done all and any such
acts, matters, deeds and things as are necessary, usual or expedient
including voting in favour of the item of business relating to the
approval of the scheme of arrangement to implement the hiving off or
demerging of the land into the resulting company;

(ii) it shall not directly or indirectly do or cause to be
done any acts, matters, deeds or things which may adversely affect or
delay the hiving off or demerging of the land into the resulting
company.

(c) (i) If for any reason the company cannot hive off or
demerge the land into the resulting company then, subject to Article 5.6
(b) (iv) and (xiv) hereto at any time when the company sells or
transfers the land or agrees to sell or transfer or otherwise develop
the land, the strategic partner shall pay to the government within seven
days of the sale or transfer of the land an amount equivalent of 25 per
cent of the benefit accruing to the company pursuant to such sale or
transfer or otherwise development of the land, as determined by the
appraiser, after taking into account any impact under the Income Tax
Act, 1961.

(ii) Subsequent to this agreement and the share purchase
agreement, if the government sells more than 25 per cent of its equity
shareholding in the company to the strategic partner, then the
percentage of amount to be paid to the government by the strategic
partner on account of sale or transfer or otherwise development of the
land under Article 4.7(c)(i) shall increase in proportion to the
percentage of such further sale of equity shareholding in the company by
the government to the strategic partner. For the purpose of this
article the term “transfer” shall include sale, lease, licence, grant of
development rights or the parting of physical possession of the land or
transfer of any interest, whatsoever, in the land.

The article provides, first of all, that whoever wins the
bid — and there could have been no plan to pass on a favour to the
Tatas, etc, for no one knew who would win the keenly contested bidding
process — shall not get the surplus land. The excess land would be
detached from VSNL. A new company would be formed, and the land would be
transferred to it.

Second, that the shareholding of this new company would be
what the shareholding of VSNL was before disinvestment. That is, the
bidder who won would have no share in it at all. The government would
have the proportion that it had before disinvestment — about 52 per
cent. Employees would have the proportion they had. The rest — about 47
per cent — would be with the general public that held shares of VSNL,
the company was listed in both India and the USA. In a word, a
government company would be set up. And this government company would
acquire the land.

Third, in case such a company could not be formed and the
disinvested VSNL decided to part with the land, it would be able to do
so only if the government agreed to the proposal. The reason for this
was that, even after disinvestment, the government would continue to
hold 26 per cent of VSNL’s equity. The sale of land, or disposal of any
rights in an asset such as land, can only be done by a special
resolution of the board and that resolution cannot go through unless the
party that holds 26 per cent of its equity agrees.

Fourth, if that new company could not be formed for some
reason, and if the government approved the proposal of VSNL to sell the
land, the entire proceeds would be distributed in accordance with the
pattern of shareholding that prevailed before disinvestment — that is,
the winner would get absolutely nothing; the proceeds would be divided
between government, employees and the general public in the proportions
in which they held the shares before disinvestment.

There was a fifth factor which was especially important,
as it caused the greatest heartburn among potential bidders. This is
contained in clause (c) (ii) reproduced above. This clause provided that
if government shed more than 25 per cent of the equity it was holding
of VSNL, then the share of the proceeds that the disinvested VSNL and
the winning bidder would have to pay to government out of any sale or
transfer of land or rights in it would increase proportionately.

Sixth, the hands of the prospective bidders were tied
tighter by incorporating a very comprehensive definition of “transfer”.
The article had used the term “transfer” of land, etc. In the last
sentence, it was provided that “for the purpose of this article the term
“transfer” shall include sale, lease, licence, grant of development
rights or the parting of physical possession of the land or transfer of
any interest, whatsoever, in the land.” All proceeds from any form of
transfer would go to the government and the original shareholders and
not a penny would go to the successful bidder.

Finally, a series of interlocking clauses tied the
prospective winner in perpetuity! Privatisation agreements have “call”
and “put” options. That is, after a specified period — say, three years —
the winner can “call” on the government to sell its residual shares.
Similarly, the government has the right to “put” its shares for sale.
But in the VSNL agreement, we provided that even if the government
parted with all its shares through either option, it would always retain
one share — known as “the golden share”; and that by virtue of this
single share, all the rights it had in regard to the surplus land would
remain with the government!

In other words, the agreement provided that neither the
surplus 774 acres nor any right in them whatsoever shall go the bidder
who succeeded in winning the contest. So, where does the minister get
this notion, parroted by some magazines, that 774 acres were gifted to
the Tatas?

“But why was the land not just taken out of VSNL before
disinvestment?” the innocent ask. VSNL was a listed company — it was
listed both in India and the US. If such a substantial asset was taken
away, any shareholder could have gone to court and halted the whole
process on the charge that his interests had been harmed. On the other
hand, if it was not taken away, the government would be accused of
making “priceless” land over to whoever succeeded in winning the bid.
Hence a solution was devised: the land would be taken out of VSNL, but
the interests of pre-disinvestment shareholders would not be impaired.
The land would be turned over to a new company in which the shareholding
pattern would be what it was before the disinvestment of VSNL. That was
an excellent solution that Basu and his colleagues devised, and it has
stood the test of time. The winner did not get the land. The
shareholders did not go to court!

“But didn’t VSNL have enormous amounts of cash? Wasn’t
this just handed over to the Tatas?” Yes, VSNL had a cash reserve. The
fact is that this cash was drawn down before the company was
disinvested. The government had VSNL declare a special dividend of 750
per cent! As a result, the winning bid along with this dividend secured
for government a P/E ratio of 11 as against the measly 6 at which VSNL
shares were trading before disinvestment.

When no other tack is left, critics are led to ask, “But
why has the new company not been set up even though nine years have
passed since VSNL was disinvested?” The fact is that the government and
the winners — the Tatas in this case — tried to work out a solution. The
attempts couldn’t get past disagreements. For instance, the Tatas said
that as the land did not belong to them, and as it was to be transferred
to a company that would in essence be a government company, the
government should pay the stamp duty that would be incurred in such
transfer. Similarly, as the monopoly of VSNL in regard to international
calls had been curtailed by two years, a compensation package was
announced by the government. They felt that this was inadequate. As the
issues could not be resolved, they proposed that the matter be referred
for arbitration. I had no problem with that proposal, but my colleagues
in the ministry correctly counselled that as the proposal had revenue
implications, we should send it to the finance ministry. That is what
was done.

The government changed. Since then, I see from what has
appeared in public that the Tatas kept writing to the government
requesting the latter to settle the matter. They wrote that there were
three alternatives, and that any one of the three would be acceptable to
them. The government — the UPA government, that is — kept saying that
it was examining the issues and would get back to them. It did not.

Kapil Sibal says this delay has been very costly to the
people of India, and that is why he has ordered an inquiry. I say —
“Bravo! Excellent!” He should institute an inquiry into the conduct of
ministers whose negligence has cost the country so much.

The ministers? P. Chidambaram and Pranab Mukherjee, the
finance ministers of the UPA governments! For, remember, the department
of disinvestment has been under the finance ministry since the UPA
formed its government in 2004. Maybe they are the real targets of this
buccaneer? No?

Why else would Kapil this time round entrust the inquiry
not just to a handpicked judge but to a handpicked officer working
directly under him?! As for me, far from being my inquisitor, Sibal is
my publicity agent! He keeps me in the news. And gratis!

The writer was Union minister for telecom and for disinvestment in the NDA government

2 comments:

According to Letter of Offer by Panaton Finvest , only 2 Class of Shareholders will be eligibal to share in Surplus Land within the stipulation as below :

1. These rights of the Government of India ( as per Paragraph 1.2 (d) , shall survive so long as the Government of India is a shareholder of VSNL.2. The rights proposed for the tendering shareholders as provided by Panatone in this Paragraph 7 shall be co-extensive with the similar rights of the Government of India under the Shareholders’ Agreement and shall lapse simultaneously with similar rights of the Government of India.

Hence , to protect interest of shareholders who had tendered shares pursuant to Letter of Offer to Panatone , Authorised , issued & Paid up Capital of Resulting Company of Paragraph 1.2 (d) read with Paragraph 7 (I) : should comprise within overall limits as below :

1. Shares of Govt. of India in VSNL being transferred to Acquirer mentioned at Paragraph 4 , before Letter of Offe : 71,250,000 Nos. 2. Shares accepted during offer by Panatone to those shareholders of VSNL who tendered their Equity Shares, including Equity Shares underlying the ADSs, to Panatone, to the extent of their tender is accepted by Panatone mentioned at Paragraph 4 : 57,000,000 Nos.

Meinmumbai wrote-"No other shareholders other than mentioned above will be eligible to Share in Surplus Land."

But how is that possible? Lets say Mr. X held VSNL shares before disinvestment. VSNL was part owner of the land. There was no record date so if Mr. X didn't surrender shares to Tatas, he was still part owner. Now if Mr. X sold shares to Mr. Y, Mr. Y is still part owner of the land. Land was owned by vsnl and it was neither sold not compensated for so current shareholder of VSNL still should be part owner of the land.

What I understand is "NO other shareholders will eligible" to get compensation from Tatas. But Tatas will get money for only 45% shares that they will distribute to 25% Govt. and 20% to share holders, who surrendered shares to Tatas. Rest will go to current shareholders.